Heritage Investment Review, Calendar Year 2018



On the whole, investors found 2018 a challenging year. Asset classes aligned with negative returns, both in the United States and internationally. This alignment made multi-asset class, diversified portfolios less effective at limiting losses. We still believe a widely diversified asset allocation benefits investors and smooths the path of returns—improving financial decision-making and planning accuracy.


Asset Allocation

Asset Class Returns

The leading asset class in 2018 was United States investment grade bonds, which returned 0.01%. All other major asset classes ended the year in negative territory. For a diversified investor, the lack of asset classes with gains made downside protection—the most important reason to diversify—a significant challenge.

At the asset class level, we structured portfolios with a global approach to stocks; we maintained a healthy position to emerging markets based on valuations; and we positioned portfolios with an underweight to investment grade bonds.

Global Approach to Stocks

In total, the United States stock market ended the calendar year down the least compared to developed international markets and emerging markets. For the first three quarters of the year, the United States stock market had a healthy positive return. However, it was then the worst performing segment of the global stock market in the fourth quarter, falling 14.30%.

Emerging Markets

Emerging markets were the weakest performing segment of the global stock market. As the most volatile asset class, they typically rank at the top or bottom of calendar year returns. In 2017 they were at the top of the list with a return of 37.28%, 16.15% above the United States. In 2018 they were at the bottom of the list with a return of -14.58%, 9.34% below the United States.

Investment Grade Bonds

In recent years interest rates have been at historically low levels and the yield curve has been relatively flat. Based on that, Heritage’s allocation to bonds has been on the lighter side—we found buying into low single-digit yields unattractive over the last few years. Over the term of this positioning, this has benefited our client portfolios.

Specific Investment Returns
At a more granular level, our stock strategies targeted the value premium and small cap premium; we focused our investment grade bond allocations on low-duration and high-credit-quality issues; and we invested in liquid alternatives in place of a mix of investment grade bonds and global stocks.

Value and Small Cap Premiums

Growth stocks outperformed value stocks and large cap stocks outperformed small cap stocks in 2018.
The empirical evidence still indicates that value stocks will outperform growth stocks, and small cap stocks will outperform large cap stocks over the long-term.

Low Duration, High Credit Quality

An area in which we performed relatively well was in investment grade bonds. Our average bond allocation was up 2.03%, with strategies ranging from 1.75% to 2.30%. For more conservative investors who need to access their portfolio for living expenses, our bond allocations provided an asset class from which to draw funds.

Liquid alternatives

For a year in which traditional asset classes disappointed, one would have hoped moving capital out of global stocks ( -9.42%) and U.S. bonds (0.01%) would have been an opportunity for outperformance.
Our alternative investments focus on return sources with risks unrelated to stocks and bonds. That doesn’t mean they’re a ‘hedge’, shorting, and therefore negating, an unwanted risk in another section of the portfolio. They’re alternative or different and unrelated compensated risks.
In 2018, the performance of our alternatives allocation was down approximately 10%—worse than United States stocks, but better than commodities, developed international stocks and emerging markets stocks.


Looking Forward

Entering 2019, we find ourselves in the midst of heightened stock market volatility, rising short-term interest rates, and political uncertainty.

Positions to Continue Pursuing

Many of our portfolio themes still make sense in the current environment.
1. We are resolved that a global investment program in stocks is an improvement over a domestic-only allocation; it spreads out risks from any one economy and participates in the profits of successful public companies, wherever they’re located.
2. We are firm believers that being price-conscious works in the long-run when investing: value investing, from an emerging markets overweight to tilts towards more attractively priced securities within each stock fund, is still the right positioning.
3. We remain optimistic that a prudent and reduced allocation to liquid alternative investments will help portfolios achieve better long-term, risk-adjusted returns.

Changes to Make

Certain dynamics of the investment environment have changed that warrant repositioning.
1. With stock prices now lower and companies’ earnings improved, we are going to sell a portion of our core liquid alternatives to add to stocks.
2. However, with elevated volatility in stocks and contractionary monetary policy in the United States, we believe the risk of a continued decline in stock prices is still possible. To be prepared, we believe it’s prudent to trim an additional piece from our core liquid alternatives to add to investment grade bonds as “dry powder” which we can use to opportunistically reposition portfolios in the future.


A year in which investments are down is always challenging. However, we have diligently reviewed our portfolio positioning and believe there are many themes which persist, while other areas warrant repositioning. As always, we aim to properly allocate your portfolio for the best probability of success. Thank you for your continued business and we look forward to working with you in 2019 and beyond.


This blogpost has been prepared solely for informational purposes, and is not an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, product, service or investment. The opinions expressed herein are solely the opinion of Heritage Financial Services and do not constitute investment advice and are subject to change without notice. Heritage customizes client portfolios based on individuals’ financial situations. Various components of this commentary may not be relevant to each client’s personal portfolio due to, without limitation, portfolio legacy securities, portfolio size, accounts with limited investment options, tax considerations, investment accreditation and personal preferences. Past performance may not be indicative of future results.
All data contained herein are believed to be accurate as of the date of publication. Data sources include Morningstar, Inc., and Yahoo! Finance, and Dimensional Fund Advisors. Heritage’s Alternatives Allocation is a combination of the underlying alternative investment ‘40-Act funds that consist of sub-strategies in reinsurance, managed futures, and absolute return categories. Certain third-party sources are relied upon for historical statements and performance information. Heritage is under no obligation to update this document as additional information becomes available or if any revisions are made to information herein contained.